Properties Magazine October 2017 : Page 55

N 0 1 2 3 4 Figure 1 $ (100,000) 9,110 9,383 9,665 9,956 + 110,504 IRR = 11.7% submarket, is expected to remain con-sistent. The higher energy efficiency of the new window system should result in savings on utilities of $3,000 per year and is expected to increase by 3% per year. Finally, I am considering selling the property in four years and am estimating a value based on capitalizing year five net operating income at 9%, with a 3% cost of sale. That’s a lot to digest but by using a systematic approach, we can put this in a format that helps in making a sound financial decision. To do this, we need to break this down into three familiar and primary financial components – present value, payment and future value – and put those into that wonderful CCIM tool, the financial T-bar. Present value is easy – the new window system will cost $100,000. Payment, or periodic cash flow, is a little trickier but we have a roadmap to make this easier, the road to net operating income (NOI). This map starts with potential rental income, which is the additional $6,500 in year one that we expect to achieve. From this, we need to deduct vacancy loss (6% or $390) and then add back the savings in operating expenses ($3,000 in year one). This collectively results in a net operating income of $9,110. Both potential rental income and operating expense savings are expected to be 3% over the holding period. Projecting the NOI forward, I would have $9,383 in year two, $9,665 in year three, $9,956 in year four and $10,255 in year five. Capitalizing year-five NOI by 9% results in sale proceeds of $113,922. Finally, deducing the 3% cost of sale ($3,418) yields sale proceeds of $110,504. Figure 1 illustrates all of these numbers in the CCIM T-bar. If you are a frequent reader of this column (and shame on you if you are not), you will recognize this simple yet valuable tool. It allows us to visualize the timing of cash flows – time (in this case, years) appears on the left of www.propertiesmag.com 55